HKMA published a report that assesses the adoption status of artificial intelligence in the banking sector in Hong Kong, along with the implications of its adoption for banking compliance and supervision. The report, which is part of a research project in collaboration with HKMA, was released by the Hong Kong Institute for Monetary and Financial Research (HKIMR). The report emphasizes that prospects for a broader and more advanced use of artificial intelligence in banking, compliance, and supervision appear promising, encouraged by gains in efficiency and enhancement in risk management. Policymakers are exploring further use of artificial intelligence in improving compliance (regtech) and supervisory capacity (suptech), which is mutually beneficial to banks and regulators.
The report provides useful insights about the risk management framework for banks adopting artificial intelligence, the overarching principles guiding the supervision of artificial intelligence adoption in banking, and the development of regtech and suptech. One of the insights is that a broader use of artificial intelligence will not only create new opportunities, but also pose new risks and challenges to banks, including the lack of quality data and data protection, and difficulty in explaining and validating artificial intelligence models. Overall, the report highlights the opportunities and challenges from broader use of the technology by bank, examines the challenges faced by regulators in supervising the use of artificial intelligence, and discusses the potential of regtech and suptech to change the landscape of compliance and banking supervision. Banks have expanded the use of regtech in data submission, regulatory reporting, and fraud detection while regulators have used suptech to gain direct access to bank data through API, extracting new insights from various types of data.
The report sets out that the stance of HKMA on the use of technology by banks is based on the principles of technology neutrality and risk-based supervision. The risk-based approach to supervision suggests that the regulator will focus on potential risks arising from the use of technologies when framing regulatory requirements. Hence, banks using more complex forms of artificial intelligence applications with greater customer impact would be scrutinized more closely than banks using simpler versions of artificial intelligence. So far, bank regulators worldwide have generally adopted the strategy of setting out guiding principles to promote a sound, fair, ethical, and transparent use of artificial intelligence technologies. In line with this practice, HKMA has implemented three sets of supervisory guidelines or initiatives to govern the prudent use of data analytics and artificial intelligence models and to strengthen the resilience of cyber-security systems.
The report argues that policy initiatives in facilitating the use of artificial intelligence in compliance and supervision can benefit both banks and regulators. In terms of regtech and suptech initiatives, the report establishes that compliance reporting functions can be enhanced by common reporting taxonomy, shared data repository, and the use of APIs by regulators to "read" the data directly from banks’ own systems. Natural language processing offers new ways to monitor banks’ sentiment and identify inconsistencies between banks’ internal management information and published versions. To achieve greater synergies from using regtech and suptech, banks and regulators may work together to explore the best use of artificial intelligence in compliance and supervision, such as introducing machine-readable regulations and enhancement of data infrastructure. Regulators can use suptech to improve data collection such as reporting, data management, and through virtual assistance. Through the use of data analytic tools, regulators can obtain more insights by extracting information from various types of data for purposes of market surveillance, misconduct analysis, and micro- and macro-prudential supervision. The report also concludes that policy initiatives in strengthening public-private cooperation can help to promote knowledge exchange and experience-sharing.
Keywords: Asia Pacific, Hong Kong, Banking, Artificial Intelligence, Regtech, Suptech, Cyber Risk, Reporting, Machine-Readable Regulations, HKMA
Previous ArticleECB Releases Results of June Survey on Credit Terms and Conditions
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.
The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.
The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.
US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.